2014 ANNUAL REPORT PEKIN LIFE INSURANCE COMPANY

Transcription

1 2014 ANNUAL REPORT PEKIN LIFE INSURANCE COMPANY PROTECTING YOUR LIFE S JOURNEY Pekin Life Insurance Company

2 Table of Contents Letter to Shareholders Significant Figures Financial Highlights Financial Bar Graphs Independent Auditor s Report Financial Statements Statutory Balance Sheets Statutory Statements of Operations and Changes in Unassigned Surplus Statutory Statements of Cash Flow Notes to Financial Statements - Statutory Basis Note 1 Nature of Operations and Summary of Significant Accounting Practices Note 2 Pension Plan, Post-Retirement Benefits, and Deferred Compensation Note 3 Affiliated Entity Transactions Note 4 Bonds and Common Stocks Note 5 Fair Value Measurement Note 6 Annuity Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics Note 7 Life and Health Reserves Note 8 Federal Income Taxes Note 9 Capital and Surplus and Dividends Inner Circle Club Members Board of Directors, Officers, and Advisors Vision, Mission, and Values

3 To Our Shareholders Strong operating results were produced in Net income increased to $5.9 million, or $0.34 per share for the year, compared to net income of $2.4 million, or $0.14 per share in The net income before net realized capital gains was $4.7 million, or $0.27 per share in 2014, compared to net loss before net realized capital gains of $789,000, or $0.05 per share last year. The continued low interest rate environment drives customers to direct their assets to the safety net provided by the guarantees available in whole life and universal life products. New term rates offered this year have also been well received and have spurred sales. Term and whole life premium is up $2.3 million to $39.5 million, an increase of 6.1 percent from last year. Conversely, this low interest rate environment has put downward pressure on the sales of fixed annuities and pre-need life policies. Premium for group annuities and single premium deferred annuities is down by $9.9 million to $3.4 million for the year. The pre-need premium is down in 2014 by $3.3 million to $37.6 million, a change of 8.0 percent from last year. Profitability in all lines of business remains our focus as opposed to growth in premium. Our exit from the optionally renewable individual health line has now been completed and premium has declined from $6.9 million in 2013 to zero in Premiums in the guaranteed renewable individual health line increased by $2.5 million, or 11.8 percent, to $23.6 million. Premium rates and underwriting guidelines for the group health line continue to be closely monitored in order to maintain the productivity of this line. Group health premium decreased by $4.9 million, or 9.8%, to $45.3 million through December 31, Decreases in life and health premiums lower our acquisition and policy expenses thus benefiting the bottom line net income as cited above. We plan for premium growth in several of our non-core states including Kansas, Louisiana, Michigan, Mississippi, Missouri, and Virginia. In March 2015, we added Texas as our twenty-first state. The fixed income investment markets played a significant role in generating realized capital gains during During the year, there were net realized capital gains of $1.2 million or $0.07 per share, compared to net realized capital gains of $3.2 million, or $0.19 per share, in Investment income, excluding capital gains increased by $1.6 million to $54.7 million in 2014, an increase of 3.0 percent from last year. This increase reflects premium dollars that have been invested in the growing bond portfolio at rates that are moderately flat from previous years. Additionally, our bond portfolio is comprised of high quality holdings, all of which are investment grade. As of December 31, 2014, assets were $1.3 billion, an increase of $22.5 million or 1.7 percent over December 31, Book value decreased during 2014 by $2.4 million, or 1.9 percent from year end This change is largely attributable to a $6.1 million reduction caused by statutory accounting requirements for pension and post-retirement obligations during this period of falling discount rate assumptions. Book value per share was $7.05 at December 31, Scott Martin succeeds Gordon Walker as Chairman of the Board and remains as Chief Executive Officer and President. Scott has been with Pekin Insurance for 38 years. In these challenging economic and regulatory times, the Company remains dedicated to our mission of providing financial protection and peace of mind for our policyholders by offering quality insurance products through independent agents. In all we do, we are dedicated to going Beyond the expected. We are sincerely thankful for the continued support of our shareholders, agents, and employees. SCOTT A. MARTIN Chairman of the Board, President, and Chief Executive Officer 1

4 Significant Figures Life Insurance in Force CHANGE Ordinary $14,016,827,000 $13,427,915, % Credit 770,373, ,774, % Group 445,077, ,140, % Total Life Insurance in Force 15,232,277,000 14,542,829, % Assets 1,324,058,801 1,301,555, % Policy Reserves 1,017,109, ,737, % Premium Income 206,207, ,967, % Payments to Policyholders and Beneficiaries 144,355, ,803, % Investment Income 54,699,562 53,077, % Net Rate of Return on Investments 4.36% 4.43% -1.6% Net Income (Loss) Before Realized Capital Gains 4,674,356 (789,234) % Net Income 5,889,957 2,419, % Net Income (Loss) Before Realized Capital Gains Per Share.27 (.05) % Realized Capital Gains Per Share % Net Income Per Share % Book Value Per Share % Premium Income By Product Line Amount % of Total Amount % of Total Ordinary Life $ 62,417,940 30% $ 60,437,941 27% Annuity 13,761,176 7% 14,457,650 6% Pre-Need Life and Annuity 39,962,418 19% 43,028,855 19% Group Life and Health 47,229,622 23% 52,294,055 23% Group Annuity 1,370,768 1% 10,971,017 5% Individual Health 23,581,488 11% 28,127,426 12% Credit Life and Health 17,883,615 9% 17,650,157 8% Total $206,207, % $226,967, % 2

5 Financial Highlights Market Price Premium Income Per Share Investment Income Per Share (.02) (.05).27 (A)(C) Earnings Per Share (.32) (.14) (D) Realized Capital Gains (Losses) Per Share (.16) (A)(B) Earnings Per Share Dividends Declared Per Share (A) Tangible Book Value Per Share 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 Common Shares Outstanding (000) 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 Weighted Average Shares Outstanding (000) % Price to Book Value Year End P/E Ratio Year End Dividend Yield (%) 108, , , , , , , ,197122, ,333 Net Worth ($000) % Profits Retained to Common Equity % Cash Dividends to Net Profit (A) The statutory basis of accounting applies (used for reporting to the respective Insurance Departments). (B) Includes realized capital gains (losses). (C) Excludes realized capital gains (losses). (D) Effective January 1, 2001, the statutory basis of accounting requires that unrealized capital losses on investments that are determined to be other than temporary declines in value must be reclassified to be realized capital losses. In 2009, 2008, and 2006, realized capital losses of $(0.41), $(0.34), and $(0.02) per share, respectively, are considered to be other than temporary declines in value and are charged to earnings. 3

6 Premium Income (In Millions) Life Insurance In Force (In Millions) 4

7 Cash and Invested Assets (In Millions) Investment Income (In Millions) 5

8 INDEPENDENT AUDITOR S REPORT To the Board of Directors and Shareholders Pekin Life Insurance Company Pekin, Illinois We have audited the accompanying statutory balance sheets of Pekin Life Insurance Company (the Company) as of December 31, 2014 and 2013, and the related statutory statements of operations, changes in unassigned surplus, and cash flow for the years then ended, and the related notes to the statutory financial statements. Management s Responsibilities for the Statutory Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the accounting practices prescribed or permitted by the Illinois Department of Insurance. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 6

9 Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles As described in Note 1 to the financial statements, the financial statements are prepared by the Company in accordance with accounting practices prescribed or permitted by the Illinois Department of Insurance, which is a basis of accounting other than accounting principles generally accepted in the United States of America, to meet the requirements of the State of Illinois. The effects on the statutory financial statements of the variances between the statutory basis of accounting described in Note 1 and accounting principles generally accepted in the United States of America, have not been determined but are presumed to be material. Adverse Opinion on U.S. Generally Accepted Accounting Principles In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations and its cash flow for the years then ended. Opinion on Regulatory Basis of Accounting In our opinion, the statutory financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations, changes in unassigned surplus, and its cash flow for the years then ended, in accordance with the accounting practices prescribed or permitted by the Illinois Department of Insurance described in Note 1. Madison, Wisconsin March 18, 2015 Strohm Ballweg, LLP 7

10 Statutory Balance Sheets December 31, 2014 and Admitted Assets: Bonds $ 1,184,419,869 $ 1,131,944,247 Common Stocks 14,526,078 13,852,529 Real Estate Occupied by the Company, Net of Depreciation 446, ,148 Cash and Short-Term Investments 25,196,923 13,465,291 Contract Loans 16,458,557 16,350,270 Securities Lending Reinvested Collateral Assets 39,546,904 81,684,438 Receivables for Securities - 16 Total Cash and Invested Assets 1,280,594,350 1,257,868,939 Life and Health Premiums Due and Unpaid 2,455,291 2,160,739 Life Premiums Deferred 19,436,859 17,695,435 Investment Income Accrued 11,944,394 11,952,756 Amounts Recoverable from Reinsurers 758,487 1,846,320 Current Federal Income Tax Recoverable 276,857 1,558,981 Net Deferred Tax Asset 8,414,244 8,233,922 Other Assets 178, ,990 Total Admitted Assets $ 1,324,058,801 $ 1,301,555,082 Liabilities: Aggregate Reserve for Contracts: Life $ 594,177,779 $ 540,706,907 Annuity 398,283, ,526,895 Health 24,648,194 22,503,973 Total Aggregate Reserve for Contracts 1,017,109, ,737,775 Contract Claims: Life 9,618,262 9,848,763 Health 11,533,904 15,322,896 Total Contract Claims 21,152,166 25,171,659 Other Policy Liabilities: Premium and Annuity Considerations Received in Advance 1,520,168 1,415,398 Policyholders' Dividends 17,463 17,420 Deposit Administration Contracts 51,433,947 46,450,769 Other Deposit-Type Contracts 17,494,301 16,860,023 Total Other Policy Liabilities 70,465,879 64,743,610 Interest Maintenance Reserve 19,737,047 18,344,710 Expenses and Taxes Accrued 11,931,420 9,594,592 Amounts Withheld or Retained 1,018,012 1,217,853 Asset Valuation Reserve 7,749,896 7,036,037 Due to Parent 496,160 1,278,559 Drafts Outstanding 4,210,529 4,688,340 Payable for Securities Lending 39,546,904 81,684,438 Pension Benefit Obligations 4,638, ,767 Post-Retirement Benefit Obligations 2,710, ,551 Other Liabilities 2,958,866 2,147,899 Total Liabilities 1,203,726,012 1,178,861,790 Capital and Surplus: Capital Stock, Par Value $1.25; 22,000,000 Shares Authorized; Shares Issued - 17,600,000; and Shares Outstanding - 17,068,023 22,000,000 22,000,000 Paid-In Surplus 900, ,000 Special Surplus Funds 214,279 - Unassigned Surplus 101,488, ,062,896 Treasury Stock, Shares at Cost, 531,977 in 2014 and 2013 (4,269,604) (4,269,604) Total Capital and Surplus 120,332, ,693,292 Total Liabilities, Capital and Surplus $ 1,324,058,801 $ 1,301,555,082 8 The accompanying notes are an integral part of the financial statements.

11 Statutory Statements of Operations and Changes in Unassigned Surplus Years Ended December 31, 2014 and Income: Life Premiums $ 111,544,892 $ 112,958,200 Annuity Considerations 17,501,310 27,580,932 Health Premiums 77,160,825 86,427,969 Net Investment Income 54,699,562 53,077,695 Total Income 260,906, ,044,796 Deductions: Benefits to Policyholders and Beneficiaries: Life 57,460,432 56,086,158 Annuity 34,220,889 32,188,577 Health 52,674,540 67,528,426 Total Benefits to Policyholders and Beneficiaries 144,355, ,803,161 Additions to Policy Reserves: Life 53,470,875 57,277,266 Annuity (242,900) 10,228,542 Health 2,144,218 1,482,287 Total Additions to Policy Reserves 55,372,193 68,988,095 Expenses: Commissions and Service Fees 21,448,250 23,068,529 General Insurance Expenses 27,461,138 29,703,516 Taxes, Licenses and Fees 4,577,440 2,999,209 Total Expenses 53,486,828 55,771,254 Total Deductions 253,214, ,562,510 Income (Loss) Before Federal Income Tax Expense and Net Realized Capital Gains 7,691,707 (517,714) Federal Income Tax Expense 3,017, ,520 Income (Loss) Before Net Realized Capital Gains, Net of Tax 4,674,356 (789,234) Net Realized Capital Gains 1,215,601 3,208,385 Net Income $ 5,889,957 $ 2,419,151 Net Income (Loss) Before Net Realized Capital Gains Per Share $ 0.27 $ (0.05) Net Realized Capital Gains, Net of Income Taxes Per Share Net Income Per Share $ 0.34 $ 0.14 Shares Outstanding 17,068,023 17,068,023 Unassigned Surplus: Unassigned Surplus - Beginning of Year $ 104,062,896 $ 100,566,348 Changes in Unassigned Surplus: Net Income 5,889,957 2,419,151 Net Unrealized Capital Gains (Losses) (601,302) 2,442,619 Asset Valuation Reserve (713,859) (1,352,905) Net Deferred Tax Asset 180,322 2,283,558 Non-Admitted Assets (129,373) 74,270 Pension Benefit Obligations (3,845,094) (411,472) Post-Retirement Benefit Obligations (2,287,753) (422,551) ACA Fee Assessment (214,279) - Shareholder Dividends - Cash ($0.05 and $0.09 per share) (853,401) (1,536,122) Net Increase (Decrease) (2,574,782) 3,496,548 Unassigned Surplus - End of Year $ 101,488,114 $ 104,062,896 The accompanying notes are an integral part of the financial statements. 9

12 Statutory Statements of Cash Flow Years Ended December 31, 2014 and 2013 Cash from Operations: Premiums Collected, Net of Reinsurance Net Investment Income Miscellaneous Income Total Cash Received Benefits and Loss Related Payments Commissions, Expenses Paid, and Other Deductions Dividends Paid to Policyholders Federal Income Taxes Paid Total Cash Disbursed Net Cash from Operations $ 205,205,860 $ 226,153,348 54,166,440 53,100,896 1,417,047 1,385, ,789, ,639, ,270, ,196,108 53,358,258 57,665,483 16,911 17,337 3,704, , ,349, ,383,600 56,439,406 68,255,936 Cash from Investments: Proceeds from Investments Sold, Matured, or Repaid: Bonds Stocks Miscellaneous Proceeds Total Investment Proceeds Cost of Investments Acquired: Bonds Stocks Miscellaneous Total Investments Acquired Net Increase in Contract Loans Net Cash from Investments 150,036, ,601,667 7,440,756 6,050,407 42,359, , ,836, ,752, ,413, ,685,754 7,505,677 6,153,745 5,498 12, ,924, ,852, , ,777 (6,196,004) (79,252,803) Cash from Financing and Miscellaneous Sources: Dividends to Shareholders Net Deposits on Deposit-Type Contracts Other Cash Provided (Applied) Net Cash from Financing and Miscellaneous Sources (853,401) (1,536,122) 5,617,454 (541,995) (43,275,823) 1,744,680 (38,511,770) (333,437) Net Change in Cash and Short-Term Investments Cash and Short-Term Investments at Beginning of Year Cash and Short-Term Investments at End of Year 11,731,632 (11,330,304) 13,465,291 24,795,595 $ 25,196,923 $ 13,465, The accompanying notes are an integral part of the financial statements.

13 1. Nature of Operations and Summary of Significant Accounting Practices Pekin Life Insurance Company (Company) is a regional Midwest life and accident and health insurance company domiciled in the State of Illinois. The Company sells insurance primarily through independent agents. Insurance products primarily include ordinary life, group health, credit life and health, annuities, and pre-need life. The accompanying financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Illinois Department of Insurance (statutory accounting practices). Prescribed statutory accounting practices include those practices denoted in the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed when such practices are approved by the insurance department of the insurer s state of domicile. The Company does not use any permitted practices. Accounting Estimates The preparation of statutory financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near term relate to: 1) the estimated life, annuity, health and disability insurance contract reserves, 2) the assumptions regarding the other than temporary impairment analysis of the investment portfolio, 3) the assumptions, including the discount rate, used to determine the benefit obligations for the defined benefit pension plan and other post-retirement benefit plan, and 4) the amount of deferred tax assets expected to be realized in future years. Summary of Significant Differences Between Statutory Accounting and GAAP A description of the significant accounting practices used by the Company and significant variances from accounting principles generally accepted in the United States of America (GAAP) are as follows: A. Investments Bonds and stocks are valued in accordance with rules prescribed by the NAIC, whereby bonds eligible for amortization under such rules are stated at amortized cost. The Company uses a modified scientific method for amortizing bonds. Common stocks are carried at fair market value. Loan-backed securities (mortgage-backed and asset-backed securities) are stated at amortized cost using a prospective basis. The prospective approach recognizes, through the recalculation of the effective yield to be applied to future periods, the effects of all cash flow whose amounts differ from those estimated earlier. Changes in amortization and amortized cost will occur in future periods. Assumptions for loan-backed securities are updated on a quarterly basis. Agency pass-through and collateralized mortgage obligations use the threemonth generic prepayment speed assumption. Non-agency collateralized mortgage obligations and asset-backed securities are updated using projected principal payment windows. Investment income is recorded when earned. Realized gains and losses on sale or maturity of investments are determined on the basis of specific identification. Aggregate unrealized capital gains and losses are credited or charged directly to unassigned surplus without income tax effect. Unrealized capital losses on investments that are determined to be other than temporary declines in value must be recognized as realized capital losses. The Company reviews its investment portfolio on a periodic basis to determine other than temporary declines in value. In evaluating whether a decline in value is other than 11

14 temporary, management considers several factors including, but not limited to: 1) the Company s ability and intent to retain the security for a sufficient amount of time for it to recover, 2) the extent and duration of the decline in value, 3) the probability of collecting all cash flows according to contractual terms in effect at acquisition or restructuring, 4) relevant industry conditions and trends, and 5) the financial condition and current and future business prospects of the issuer. Under GAAP, equity securities that have readily determinable fair values and debt securities would be classified into three categories: held-to-maturity, trading, and available-for-sale. Held-to-maturity securities would be reported at amortized cost. Trading securities would be reported at fair value, with unrealized gains and losses included in earnings. Available-forsale securities would be reported at fair value, with unrealized gains and losses, net of applicable taxes, reported as a separate component of unassigned surplus. Contract loans are stated at the aggregate of unpaid loan balances, which approximate fair value. These stated values are not in excess of cash surrender values of related policies. The investment in the Company s wholly owned subsidiary is accounted for using the statutory equity method in which undistributed earnings are reported as unrealized gains and losses; under GAAP, the financial statements of the subsidiary would be consolidated with those of the Company. The asset valuation reserve (AVR) is maintained as prescribed by the NAIC for the purpose of stabilizing surplus against fluctuations in the market values of invested assets. The AVR is reported as a liability and changes are charged or credited directly to unassigned surplus. The AVR would not be required under GAAP. The interest maintenance reserve (IMR) is maintained as prescribed by the NAIC to defer realized capital gains and losses which result from changes in interest rates for fixed income securities and to amortize these capital gains and losses into investment income over the remaining life of the investments sold, rather than reflecting the gains or losses in the year of sale. Under GAAP, realized capital gains and losses would not be deferred, amortized, or combined with investment income. An occupancy rental charge on home office real estate owned is recorded as investment income and as offsetting rental expense; under GAAP, no such rental charge would be recognized. B. Non-Admitted Assets Certain assets, designated as non-admitted assets, aggregating $2,056,509 and $1,926,366 at December 31, 2014 and 2013, respectively, are not recognized by statutory accounting practices. These assets are excluded from the balance sheet, and the net change in such assets is charged or credited directly to unassigned surplus. Non-admitted deferred tax assets are not included in the amounts above. The change in the non-admitted deferred tax asset is charged or credited directly to unassigned surplus. Under GAAP, such assets would be included in the balance sheet and the net change in such assets would be recognized as a component of net income. C. Policy Reserves and Claim Reserves Policy reserves on life insurance are based on statutory mortality and interest rate requirements and are computed using principally net level and modified preliminary term methods with interest rates ranging primarily from 2.25 percent to 6.0 percent. The use of a modified reserve basis partially offsets the effect of immediately expensing policy acquisition costs. Policy reserves on annuities are based on statutory mortality and interest requirements with interest rates ranging primarily from 3.50 percent to 9.25 percent. Under GAAP, reserves would be based on mortality, lapse, withdrawal, and interest rate assumptions that are based on Company experience. 12

15 Liabilities for accident and health policies include unearned premiums and additional reserves. The liability for future policy benefits and claims on life and health insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Changes in estimates are reflected in current operations. D. Reinsurance The Company has long-standing reinsurance treaties in place for its life and health insurance business to reduce exposure to large losses. Although reinsurance does not relieve the Company of its legal liability to its policyholders, it provides a measure of protection against catastrophic losses and provides a means of risk reduction on individual losses. In order to maintain an appropriate balance between the cost of reinsurance and surplus growth, the Company periodically evaluates its retention levels correlated to specific types of life and health insurance policies. E. Premiums Premiums deferred and uncollected represent modal premiums, either due and uncollected or not yet due, where policy reserves have been provided on the assumption that the full modal premium for the current policy year has been collected. Also, where policy reserves have been provided on a continuous premium assumption, premiums uncollected are similarly defined. Premiums and annuity considerations are recognized as income over the premium paying period of the policies. Acquisition costs, such as commissions and other costs related to the new business, are expensed as incurred. Contracts that permit the insured to change the amount and timing of premium payments, such as universal life products, are recorded as revenue when received. Under GAAP, revenues would include only policy charges for the cost of insurance, contract initiation and administration, surrender charges, and other fees that have been assessed against contract account values, and benefits would represent the excess of benefits paid over the policy account value and interest credited to the account values. Additionally, acquisition costs under GAAP would be capitalized and amortized over the policy period. F. Cash and Short-Term Investments For purposes of reporting cash flows, the Company follows statutory accounting practices and considers cash in checking accounts and certain money market funds and highly liquid debt instruments purchased with a remaining maturity of one year or less to be cash and short-term investments. The Company occasionally has on deposit in a financial institution a balance in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). On December 31, 2014, the Company holds approximately $3.8 million in one financial institution in excess of the FDIC limit. The Company does not believe it is exposed to any significant credit risks on this account. G. Affordable Care Act Fee Assessment On January 1, 2014, the Company became subject to an annual fee under Section 9010 of the Affordable Care Act (ACA). This annual fee is allocated to individual health insurers based on the ratio of the amount of the entity s net premiums written during the preceding calendar year to the amount of health insurance for any United States health risk that is written during the preceding calendar year. A health insurance entity s portion of the annual fee becomes payable once the entity provides health insurance for any United States health risk for each calendar year beginning on or after January 1, As of December 31, 2014, the Company has written health insurance subject to the ACA fee assessment, expects to conduct health insurance business in 2015, and estimates their portion of the annual health insurance industry fee to be payable on September 30, 2015, to be $214,

16 The ACA fee assessment and the related impact to risk-based capital are shown below for the years ending December 31, 2014 and ACA Fee Assessment Payable for the Upcoming Year $ 214,279 * $ 520,844 ACA Fee Assessment Paid $ 306,632 $ - Premium Written Subject to ACA 9010 Assessment $ 46,427,916 $ 58,333,778 Total Adjusted Capital Before Surplus Adjustment $ 128,091,417 N/A Authorized Control Level Before Surplus Adjustment $ 11,702,163 N/A Total Adjusted Capital After Surplus Adjustment $ 127,877,138 N/A Authorized Control Level After Surplus Adjustment $ 11,702,163 N/A * Reflected in Special Surplus Funds H. Subsequent Events Subsequent events were evaluated through March 18, 2015, which is the date the financial statements were available to be issued. I. Other Treasury stock is recorded at cost and reported as a reduction of capital and surplus under both statutory accounting practices and GAAP. Deferred income taxes are provided for differences between the financial statement and the tax bases of assets and liabilities and are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Additionally, under statutory accounting practices, limitations are placed on the admissibility of deferred tax assets. All changes in deferred tax assets and liabilities are reported as changes in surplus, and state income taxes are not included in deferred tax calculations; under GAAP, deferred income taxes would be provided for differences between the financial statement and the tax bases of assets and liabilities and any deferred tax assets would be reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in deferred tax assets and liabilities would be reported through operations and/or surplus depending on their characteristics and state income taxes would be included in the deferred tax calculation. Statutory financial statements are prepared in a form using language and groupings substantially the same as the annual statement filed with the NAIC and state regulatory authorities which differ from the presentation and disclosure of financial statements presented under GAAP. Necessary reclassifications are made in prior period financial statements, whenever appropriate, to conform to the current presentation. 2. Pension Plan, Post-Retirement Benefits, and Deferred Compensation 14 Retirement Benefits The Company, its parent (The Farmers Automobile Insurance Association), and its affiliates participate in a trusteed non-contributory defined benefit pension plan. This plan covers full-time employees who have completed one year of service and have reached the age of 21. Effective January 1, 2013, the Company adopted an amendment to freeze participation in the Plan for employees hired after January 1, The Company s funding policy is to contribute annually an amount that represents the current cost of benefits expected to be earned in the current year offset by the expected asset return higher than the discount rate, but no more than the maximum amount that can be deducted for federal income tax purposes. Each affiliate is charged for its applicable share of such contributions based on a percent of projected benefit obligation.

17 Pursuant to a retirement plan for Directors elected prior to 2004, eligible Directors will receive a retirement benefit equal to the annual retainer in effect on the Directors retirement dates. The benefits paid were $58,300 in 2014 and 2013, respectively. The liability for the Directors retirement benefit is $497,496 and $537,356 at December 31, 2014 and 2013, respectively. 401(k) Savings Plan The Company and its affiliates participate in a voluntary 401(k) savings plan for eligible participants. New full-time employees are automatically enrolled in the Plan with instant entry after approximately 30 days of employment. The Company may elect, in its sole discretion, to contribute a matching contribution to the savings plan. In 2014 and 2013, the Company elected to match 25 percent of the employee s contribution up to a maximum match of $400 to employees hired prior to January 1, Employees hired after January 1, 2013, may receive, at the discretion of the Company, a contribution from the Company based on a percentage of eligible earnings and a Company match of the employee s percentage of contribution. For 2014 and 2013, the Company contributed 3.5 percent of employees eligible earnings and a 75.0 percent match of the employees percentage of contribution not to exceed 6.0 percent. Employer contributions of $61,451 and $40,881, respectively, were made to this plan for all participants in 2014 and Post-Retirement Benefits In addition to providing pension benefits, the Company and its affiliates provide certain health care and life insurance benefits (post-retirement benefits) for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. Deferred Compensation The Company maintains a deferred compensation plan for the Directors. This plan allows for voluntary deferral of all or any part of the compensation to which a Director might otherwise be entitled to as Directors fees, in accordance with the plan provisions. During 2014 and 2013, $44,500 and $10,000, respectively, of Directors fees were deferred. The liability for Directors deferred compensation was $159,198 and $123,949 at December 31, 2014 and 2013, respectively. Expected Cash Flows The Company expects to contribute $1,113,500 to the Pension Plan and $371,167 to the Post- Retirement Benefit Plan in The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Year Pension Benefits Post-Retirement Benefits 2015 $ 809,737 $ 381, , , ,185, , ,488, , ,782, , to ,498,969 3,039,323 15

18 Assets, Obligations, and Assumptions A summary of assets, obligations, and assumptions of the Pension and Post-Retirement Benefit Plans for the Company is as follows at December 31: Change in Benefit Obligation: Benefit Obligation at Beginning of Year $ 17,461,331 $ 21,401,710 $ 12,427,785 $ 5,481,976 Service Cost 1,116,823 1,330, , ,733 Interest Cost 904, , , ,647 Actuarial Loss (Gain) 5,126,159 (2,090,867) 2,367, ,320 Benefits Paid (896,343) (4,503,091) (296,933) (214,024) Plan Amendments - 509,825-5,664,133 Benefit Obligation at End of Year Pension Benefits Post-Retirement Benefits $ 23,712,626 $ 17,461,331 $ 15,684,340 $ 12,427,785 The projected benefit obligation of the Company in relation to the total obligation of the Company and its affiliates (excluding inactive participants) is the basis for allocating the Pension Plan assets and the net periodic benefit cost. The net periodic benefit cost of the Pension and Other Post-Retirement Benefit Plans is measured on a seriatim basis that projects future benefit costs participant by participant based on demographic characteristics. The projected costs are discounted to a present value. A summary of the plan assets, funded status, and net periodic benefit cost of the Pension and Post-Retirement Benefit Plans for the Company is as follows for the years ended December 31: Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year Actual Return on Plan Assets Employer Contribution Benefits Paid Fair Value of Plan Assets at End of Year Pension Benefits Post-Retirement Benefits $ 12,528,419 $ 12,092,142 $ 4,218,392 $ 3,293,830 2,459,595 2,183, , ,509 1,365,540 2,755, , ,547 (896,343) (4,503,091) (226,984) (158,494) $ 15,457,211 $ 12,528,419 $ 4,638,070 $ 4,218,392 Funded Status: Recognized Liabilities Accrued Benefit Costs $ 1,615,155 $ 1,631,902 $ 4,701,909 $ 3,776,567 Liability for Pension Benefits 4,638, ,767 2,710, ,551 Total Liabilities Recognized $ 6,254,016 $ 2,425,669 $ 7,412,213 $ 4,199,118 Unrecognized Liabilities $ 2,001,399 $ 2,507,243 $ 3,634,057 $ 4,010,275 Accumulated Benefit Obligation $ 16,889,011 $ 12,434,623 $ 15,684,340 $ 12,427,785 16

19 Components of Net Periodic Benefit C ost: Service C ost Pension Benefits Post-Retirement Benefits $ 1,386,897 $ 1,840,273 $ 510,469 $ 487,835 1,123,423 1,125, , ,765 Interest C ost Expected (Return) Loss on Plan Assets (1,067,556) (996,117) (266,142) (224,314) Transition Obligation 31,504 32, Net Losses 103, , Prior Service C ost 224, , , ,023 Settlement Expense - 767, Total Net Periodic Benefit C ost $ 1,802,872 $ 3,505,270 $ 1,450,471 $ 1,382,188 The settlement expense is reflective of a portion of unrecognized loss due to total annuity purchases and lump sum distributions in excess of total service cost and interest cost for the year. The settlement expense is charged to income as a component of net periodic benefit cost. Following are components of net periodic benefit cost as they related to unassigned surplus at December 31, 2014 and 2013: Amounts in Unassigned Surplus Recognized as Components of Net Periodic Benefit Cost: Items Not Yet Recognized from Prior Year $ 3,344,339 $ 7,186,261 $ 5,018,370 $ (515,412) Net Transition Obligation Recognized (31,504) (32,606) (878) (879) Net Prior Service Cost Arising During the Period - 509,825-5,664,133 Net Prior Service Cost Recognized (224,965) (238,415) (551,907) (552,023) Net (Gain) Loss Arising During the Period 3,246,081 (3,241,694) 2,365, ,551 Net (Gain) Loss Recognized 221,877 (839,032) - - Items Not Yet Recognized Current Year $ 6,555,828 $ 3,344,339 $ 6,830,659 $ 5,018,370 Amounts in Unassigned Surplus Expected to Be Recognized in the Next Fiscal Year as Components of Net Periodic Benefit Cost: Net Transition Obligation Recognized $ 31,504 $ (32,606) $ - $ 879 Net Prior Service Cost $ 180,513 $ 168,304 $ 562,462 $ 551,097 Net Recognized Losses $ 273,084 $ 77,536 $ 38,680 $ - Amounts in Unassigned Surplus Not Yet Recognized as Components of Pension Benefits Post-Retirement Benefits Net Periodic Benefit Cost: Net Transition Obligation Recognized $ 152,214 $ 164,984 $ - $ 879 Net Prior Service Cost $ 187,733 $ 342,718 $ 4,647,532 $ 5,112,226 Net Recognized (Gains) Losses $ 6,215,881 $ 2,836,637 $ 2,183,127 $ (94,735) 17

20 Weighted average assumptions used to determine the projected benefit obligation are shown below at December 31: Pension Benefits Post-Retirement Benefits Discount Rate Rate of Compensation Increase 4.09% 4.88% 4.49% 5.33% 3.50% to 7.00% 3.50% to 7.00% N/A N/A Weighted average assumptions used to determine the net periodic benefit cost for the years ended December 31: Pension Benefits Post-Retirement Benefits Discount Rate Rate of Compensation Increase Expected Long-Term Rate of Return on Plan Assets 4.88% 3.99% 5.33% 4.77% 3.50% to 7.00% 3.50% to 7.00% N/A N/A 6.50% 6.25% 6.50% 6.25% The health care portion of the post-retirement benefit plan is contributory, with participants contributions adjusted annually as determined by the Company; the life insurance portion of the post-retirement benefit plan is non-contributory. The health care cost trend rate in 2014 was assumed to be 7.5 percent for one year, then 7.0 percent for one year, then 5.0 percent by In 2013, the health care cost trend was assumed to be 8.5 percent for one year, then 8.0 percent for one year, then 5.0 percent by Assumed health care cost trend rates have a significant effect on the amounts reported for the health care portion of the post-retirement benefit plan. A one-percentage-point change in assumed health care trend rates would have the following effects: One Percentage Point Increase One Percentage Point Decrease Effect on Total of Service and Interest Cost Components $ 422,286 $ (306,525) Effect on Post-Retirement Benefit Obligation $ 3,639,782 $ (2,743,095) During 2013, the Company adopted Statement of Statutory Accounting Principle No. 102, Accounting for Pensions, which requires the difference between the projected benefit obligation and the fair value of plan assets to be recorded on the statutory balance sheet. If the projected benefit obligation is greater than the fair value of plan assets, a liability is recorded. However, if the projected benefit obligation is less than the fair value of plan assets, a non admitted asset is recorded. In addition, non-vested participants are to be included in calculations such as the projected benefit obligation and net periodic pension cost. 18

21 Although the Company elected to phase in the surplus impact over a period not to exceed ten years, the Company must continue to recognize a minimum amount of the transition liability that is at least equal to the amortization of the unrecognized items in effect at transition. The recognized surplus impact and remaining transition liability for the Company is as follows for the years ended December 31: Transition Liability at Beginning of Year $ 2,507,243 $ 7,696,086 Settlements - (555,036) Plan Gains - (3,218,527) Amount Recognized (505,844) (1,415,280) Remaining Transition Liability at End of Year $ 2,001,399 $ 2,507,243 Additionally, the Company adopted Statement of Statutory Accounting Principle No. 92, Accounting for Postretirement Benefits Other Than Pensions, which requires a liability, equal to the accumulated post-retirement benefit obligation, be established for vested and non vested employees. Although the Company elected to phase in the surplus impact over a period not to exceed ten years, the Company must continue to recognize a minimum amount of the transition liability that is at least equal to the amortization of the unrecognized items in effect at transition. The recognized surplus impact and remaining transition liability for the Company is as follows for the years ended December 31: Transition Liability at Beginning of Year $ 4,010,275 $ 4,386,493 Recognized (376,218) (376,218) Remaining Transition Liability at End of Year $ 3,634,057 $ 4,010,275 The retirement plan assets are held in a deposit administration contract and equity securities. The Trustees of the Farmers Automobile Insurance Association Retirement Plan maintain a deposit administration contract with the Company for pension benefits. The contract is a group annuity contract consisting of employer contributions with guaranteed interest, less annuities purchased to provide benefit payments to retirees and lump sum benefits paid directly to participants. The fair value of the contract included in plan assets of the Company and its affiliates was $28,529,899 and $25,225,265 as of December 31, 2014 and 2013, respectively, or 41 and 42 percent of total plan assets. Equity securities comprise the remaining plan assets. At December 31, 2014 and 2013, equity securities amounted to $40,878,222 and $35,327,650, respectively, or 59 and 58 percent of total plan assets. The expected long-term rate of return on plan assets was selected based upon current market conditions, company experience, and future company expectations. The specific goal of the investment portfolio is to maintain a fully funded plan over time to ensure the benefit for the plan participants. New contributions are invested in equity securities until the amount in equities exceeds 45 percent of the plan s total assets. Additional amounts will be paid into the deposit administration contract, unless the equity portfolio falls under 45 percent. If the equity portfolio exceeds 60 percent of the plan s assets, part of the equity portfolio will be liquidated and proceeds moved into the deposit administration contract within a reasonable time frame. There are three return objectives. The primary benchmark is the projected annual rate of return used by the plan s actuary. The average annualized investment performance of the invested assets, net of investment related expenses, should be equal to or in excess of this benchmark. The secondary (equity) benchmark is the percent total rate of return of a balanced portfolio comprised of a 70 percent weighting of the Standard & Poor s 500 Index and a 30 percent weighting of the Barclay s Government Corporate Index. The secondary (fixed income) benchmark is the weighted average rate of return of the Company s mortgage-backed securities portfolio less 0.75 percent which includes 0.25 percent for expenses and 0.50 percent 19

22 for spread. All plan assets, in excess of those funds targeted for short-term cash flow needs, should be invested in a manner consistent with the basic principles of prudent long-term portfolio management. Derivatives, private placement securities, and commodity contracts are prohibited investment vehicles. The Trustees of the plan recognize the long-term nature of the majority of the plan s assets. The Farmers Automobile Insurance Association Retirement Plan maintains an account to partially fund health benefits provided to certain retirees and eligible dependents through a deposit administration contract with the Company. The permissible account funding was determined in accordance with generally recognized and accepted actuarial principles and practices, which are consistent with the Actuarial Standards of Practice. As of December 31, 2014 and 2013, the fair value of the contract was $22,904,048 and $21,225,504, respectively. Contributions of $2,200,000 and $4,232,911 were made in 2014 and 2013, respectively, into the deposit administration contract. The Company s share of the contribution was $455,180 and $918,547 in 2014 and 2013, respectively. The Company utilizes the following valuation techniques in determining the level, within the fair value hierarchy, of the Pension Plan and Post-Retirement Plan assets: Level 1 Quoted market prices reported on the active markets on which the individual stocks and money market funds are traded. Level 3 Principal valuation technique is discounted cash flow. Unobservable inputs are credit rate and payout date. The following table sets forth by level, within the fair value hierarchy, the assets of the Pension Plan and Post-Retirement Plan at fair value as of December 31, 2014: Assets at Fair Value as of December 31, 2014 Level 1 Level 2 Level 3 Total Pension Plan Assets: Equity Securities Consumer Discretionary $ 3,792,795 $ - $ - $ 3,792,795 Consumer Staples 3,914, ,914,375 Energy 3,253, ,253,200 Financials 6,751, ,751,258 Health Care 3,062, ,062,734 Industrials 5,242, ,242,335 Information Technology 4,273, ,273,422 Materials 1,121, ,121,530 Telecommunications 1,110, ,110,070 Utilities 7,724, ,724,670 Total Equity Securities $ 40,246,389 $ - $ - $ 40,246,389 Cash and Cash Equivalents 631, ,833 Deposit Administration Contract ,529,899 28,529,899 Total Pension Plan Assets $ 40,878,222 $ - $ 28,529,899 $ 69,408,121 Post-Retirement Plan Assets: Deposit Administration Contract ,904,048 22,904,048 Total Post-Retirement Plan Assets $ - $ - $ 22,904,048 $ 22,904,048 20

23 The following table sets forth by level, within the fair value hierarchy, the assets of the Pension Plan and Post-Retirement Plan at fair value as of December 31, 2013: Assets at Fair Value as of December 31, 2013 Level 1 Level 2 Level 3 Total Pension Plan Assets: Equity Securities Consumer Discretionary $ 3,027,080 $ - $ - $ 3,027,080 Consumer Staples 3,487, ,487,485 Energy 3,576, ,576,100 Financials 5,914, ,914,907 Health Care 2,538, ,538,950 Industrials 4,856, ,856,775 Information Technology 3,545, ,545,385 Materials 918, ,950 Telecommunications 1,029, ,029,222 Utilities 6,282, ,282,090 Total Equity Securities $ 35,176,944 $ - $ - $ 35,176,944 Cash and Cash Equivalents 150, ,706 Deposit Administration Contract ,225,265 25,225,265 Total Pension Plan Assets $ 35,327,650 $ - $ 25,225,265 $ 60,552,915 Post-Retirement Plan Assets: Deposit Administration Contract ,225,504 21,225,504 Total Post-Retirement Plan Assets $ - $ - $ 21,225,504 $ 21,225,504 The table below sets forth a summary of changes in the fair value of the Pension Plan and Post- Retirement Plan s level three assets for the years ended December 31: Level 3 Assets Pension Benefits Post-Retirement Benefits Balance, Beginning of Year $ 25,225,265 $ 27,974,521 $ 21,225,504 $ 17,048,871 Interest Income 980,125 1,067, , ,465 Purchases 6,600,000 12,700,000 2,200,000 4,232,911 Withdrawals (4,275,491) (16,516,610) (1,274,993) (788,743) Balance, End of Year $ 28,529,899 $ 25,225,265 $ 22,904,048 $ 21,225, Affiliated Entity Transactions The Farmers Automobile Insurance Association (Association) and its wholly owned subsidiary, Pekin Insurance Company, owned percent and percent of the Company at December 31, 2014 and 2013, respectively. The Company and the Association utilize many common facilities, management, administrative and office personnel, and services. The Association incurs such expenses and allocates the related cost to the Company on a specific identification basis. Intercompany balances are paid periodically throughout the year based on estimates and settled within 45 days after year end based on actual allocated expenses. Such expenses allocated to the Company were $6,099,502 in 2014 and $6,999,482 in The Company owns 100 percent of the common stock of Pekin Financial Life Insurance Company, a stock life insurance company. The carrying value of the subsidiary was $17,369 and $24,199, respectively, as of December 31, 2014 and Notes receivable include demand notes and a surplus note due from Pekin Financial Life Insurance Company totaling $525,000 as of December 31, 2014 and

24 The Company s home office building has a book value of $446,019 and was constructed on land leased from the Association for a term expiring on December 31, 2026, with a year-to-year extension of the lease thereafter. Automatic termination would occur with change of control of the Company. The Association has an irrevocable option to purchase the building at any time during the lease or in the event the lease is canceled. The purchase price of the building shall be the fair market value as of the closing date. The annual lease payment is $1,000. In connection with structured settlements, the Association purchased 16 annuities from the Company in 2014 and 15 annuities in The single premium for these annuities totaled $942,576 and $891,237 in 2014 and 2013, respectively. The reserve carried by the Company at December 31, 2014 and 2013, is $5,999,299 and $5,323,101, respectively. The Association s claimant is the payee. 4. Bonds and Common Stocks The admitted value, unrealized gain and loss, and market value of investments in bonds as of December 31, 2014, are as follows: 2014 Admitted Unrealized Unrealized Market Obligation Value Gain Loss Value U.S. Government $ 1,966,857 $ 61,814 $ 4,046 $ 2,024,625 Other Government 7,976, ,576-8,604,271 U.S. States, Territories and Possessions 5,999, ,360-6,540,280 U.S. Political Subdivisions 10,955,610 1,041,151-11,996,761 U.S. Special Revenue and Special Assessment 77,181,059 14,316,725-91,497,784 Industrial and Miscellaneous 712,094,624 81,055,343 5,417, ,732,817 Loan-Backed Securities 368,245,104 12,975,600 1,051, ,169,072 Total $ 1,184,419,869 $ 110,618,569 $ 6,472,828 $ 1,288,565,610 The admitted value, unrealized gain and loss, and market value of investments in bonds as of December 31, 2013, are as follows: 2013 Admitted Unrealized Unrealized Market Obligation Value Gain Loss Value U.S. Government $ 1,939,797 $ 112,140 $ - $ 2,051,937 Other Government 7,973, ,758-8,244,683 U.S. States, Territories and Possessions 5,999,920 23,800 70,800 5,952,920 U.S. Political Subdivisions 9,972, , ,856 10,536,639 U.S. Special Revenue and Special Assessment 84,289,563 6,302, ,280 90,353,159 Industrial and Miscellaneous 712,818,067 50,323,075 19,774, ,366,515 Loan-Backed Securities 308,950,067 7,551,999 7,797, ,704,371 Total $ 1,131,944,247 $ 65,269,235 $ 28,003,258 $ 1,169,210,224 22

25 The admitted value and market value of bonds at December 31, 2014, by contractual maturity, are shown below: Due in One Year or Less Due After One Year Through Five Years Due After Five Years Through Ten Years Due After Ten Years Total Loan-Backed Securities Total Admitted Value Market Value $ 6,486,505 $ 6,602, ,058, ,983, ,024, ,021, ,605, ,788, ,174, ,396, ,245,104 * 380,169,072 $ 1,184,419,869 $ 1,288,565,610 *The admitted value of mortgage-backed securities includes $3,131,513 and $3,845,208 of U.S. Government Guaranteed Securities for 2014 and 2013, respectively. The Company does not engage in direct subprime residential mortgage lending. The Company s minimal exposure to subprime lending is limited to investments within the fixed maturity investment portfolio which contain securities collateralized by mortgages that have characteristics of subprime lending such as adjustable rate mortgages and alternative documentation mortgages. These investments are in the form of asset-backed securities collateralized by subprime mortgages and collateralized mortgage obligations backed by alternative documentation mortgages. The total carrying value of these investments is $873,462 and $1,151,780 at December 31, 2014 and 2013, respectively, comprising 0.07 percent and 0.10 percent of the Company s total fixed maturity portfolio. The adjusted cost and market value of investments in common stock as of December 31 are as follows: Adjusted Market Adjusted Market Common Stock Cost Value Cost Value Common Stock $ 11,138,530 $ 14,526,078 $ 9,870,509 $ 13,852,529 Gross Unrealized Gains $ 3,658,563 $ 4,066,768 Gross Unrealized Losses $ 271,015 $ 84,748 23

26 Securities with unrealized losses based on estimated market values as of December 31, 2014, are shown below: Description of Securities U.S. Government Less Than 12 Months 12 Months or More Total Market Unrealized Market Unrealized Market Unrealized Value Losses Value Losses Value Losses $ 545,313 $ 4,046 $ - $ - $ 545,313 $ 4,046 Industrial and Miscellaneous 28,601, , ,803,454 4,456, ,404,460 5,417,150 Loan-Backed Securities 8,645,507 29,021 70,158,406 1,022,611 78,803,913 1,051,632 Subtotal Debt Securities 37,791, , ,961,860 5,478, ,753,686 6,472,828 Common Stocks 3,563, , ,987 39,910 3,823, ,015 Total Securities with Unrealized Losses $ 41,355,096 $ 1,225,038 $ 220,221,847 $ 5,518,805 $ 261,576,943 $ 6,743,843 Securities with unrealized losses based on estimated market values as of December 31, 2013, are shown below: Description of Securities U.S. States, Territories and Less Than 12 Months 12 Months or More Total Market Unrealized Market Unrealized Market Unrealized Value Losses Value Losses Value Losses Possessions $ 3,929,120 $ 70,800 $ - $ - $ 3,929,120 $ 70,800 U.S. Political Subdivisions 2,184, , ,184, ,856 U.S. Special Revenue and Special Assessment 5,496, , ,496, ,280 Industrial and Miscellaneous 213,488,321 14,070,418 62,792,763 5,704, ,281,084 19,774,627 Loan-Backed Securities 159,033,094 7,797, ,033,094 7,797,695 Subtotal Debt Securities 384,131,929 22,299,049 62,792,763 5,704, ,924,692 28,003,258 Common Stocks 990,976 62, ,319 21,990 1,193,295 84,748 Total Securities with Unrealized Losses $ 385,122,905 $ 22,361,807 $ 62,995,082 $ 5,726,199 $ 448,117,987 $ 28,088,006 Proceeds from sales of investments in debt securities, excluding calls and maturities, during 2014 and 2013, were $141,136,695 and $143,991,667, respectively. Gross gains of $6,807,816 and $7,725,737 and gross losses of $1,146,434 and $595,480 were realized on those sales, respectively. Net gains in the amount of $3,679,900 and $4,634,667 were deferred to the IMR in 2014 and 2013, respectively. In 2014 and 2013, there were no realized capital gains from the sale of other invested assets. In 2014 and 2013, there were no unrealized capital losses on investments that were determined to be other than temporary declines in value and were recognized as realized capital losses. Bonds carried at $1,552,708 and $1,515,715 at December 31, 2014 and 2013, respectively, are on deposit with the Illinois Department of Insurance as required by law. Bonds carried at $414,149 and $424,082 at December 31, 2014 and 2013, respectively, are on deposit with the Virginia Department of Insurance. Assets in the amount of $35,000 and $0 at December 31, 2014 and 2013, respectively, are on deposit with the Georgia Department of Insurance. 24

27 Securities Lending The Company lends securities to agreed upon borrowers through an agreement with its custodian. The Company requires initial collateral from the borrower in an amount no less than 102 percent and 105 percent of the fair value of the securities loaned at the outset of the contract. All collateral so received is held either in the physical custody of the custodian or for the account of the custodian by their agent or a central bank. The offsetting collateral liability is included in Payable for Securities Lending. At December 31, 2014 and 2013, respectively, the amount of securities loaned was $38,581,419 and $81,462,109, and the related collateral was $39,588,227 and $83,292,617. At December 31, 2014, collateral assets valued at $926,365 had maturity dates beyond one year. The aggregate amount of cash collateral received as of December 31, 2014 and 2013, is shown below by maturity date: Maturity Date Fair Value Fair Value Open $ 5,950,111 $ 13,793, Days or Less 3,392,711 10,603, to 60 Days 7,913,687 16,183, to 90 Days 12,660,313 18,332,705 Greater Than 90 Days 9,671,405 24,379,750 Total Collateral Received $ 39,588,227 $ 83,292,617 The aggregate amount of cash collateral reinvested as of December 31, 2014 and 2013, is shown below by maturity date: Amortized Fair Amortized Fair Cost Value Cost Value 30 Days or Less $ 9,329,612 $ 9,329,692 $ 23,927,961 $ 23,928, to 60 Days 7,903,980 7,904,366 15,871,436 15,872, to 90 Days 8,008,530 8,008,691 9,396,760 9,397, to 120 Days 5,997,006 5,996,872 13,378,058 13,378, to 180 Days 2,984,660 2,984,564 6,832,505 6,833, to 365 Days 4,398,559 4,398,215 8,265,317 8,261,853 1 to 2 Years 924, ,718 3,754,201 3,755,184 2 to 3 Years , ,188 Greater Than 3 Years Total Collateral Reinvested $ 39,546,904 $ 39,547,118 $ 81,684,438 $ 81,686,362 As of December 31, 2014 and 2013, the Company had $97,383,481 and $136,005,347, respectively, in gross restricted assets related to securities lending agreements. This amount represents securities that are available to be borrowed and as such are not available for general use by the Company. 25

28 5. Fair Value Measurement Statutory Accounting Practices establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (level one measurements) and the lowest priority to unobservable inputs (level three measurements). The three levels of the fair value hierarchy under statutory accounting are described below: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets in active markets that the Company has the ability to access. Level 2 Inputs to the valuation methodology include quoted prices for similar assets in active markets; quoted prices for identical or similar assets in inactive markets; inputs other than quoted prices that are observable; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of the Level 2 securities are obtained from independent pricing services or from the Company s investment manager and are determined using quoted market prices from an orderly market at the reporting date for those or similar investments. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The following table sets forth by level, within the fair value hierarchy, the Company s financial instruments that are reported at fair value within the statutory balance sheet as of December 31, 2014: 2014 Description Level 1 Level 2 Level 3 Total Common Stock $ 14,526,078 $ - $ - $ 14,526,078 The following table sets forth by level, within the fair value hierarchy, the Company s financial instruments that are reported at fair value within the statutory balance sheet as of December 31, 2013: 2013 Description Level 1 Level 2 Level 3 Total Common Stock $ 12,467,116 $ 1,385,413 $ - $ 13,852,529 The Company does not have any liabilities measured at fair value at December 31, 2014 and There were no Level 3 assets at December 31, 2014 or Assets within the Level 2 fair value hierarchy at December 31, 2013, were either sold during 2014 or categorized as Level 1 within the fair value hierarchy in accordance with the above framework for measuring fair value. The aggregate fair value of all financial instruments as of December 31, 2014, is shown below. Aggregate Admitted Fair Value Assets Level 1 Level 2 Level 3 Bonds $ 1,288,565,610 $ 1,184,419,869 $ 2,024,625 $ 1,286,540,985 $ - Common Stock 14,526,078 14,526,078 14,526, Short-Term Investments 19,883,304 19,883,304 19,883,

29 The aggregate fair value of all financial instruments as of December 31, 2013, is shown below. Aggregate Admitted Fair Value Assets Level 1 Level 2 Level 3 Bonds $ 1,169,210,224 $ 1,131,944,247 $ 2,051,937 $ 1,167,158,287 $ - Common Stock 13,852,529 13,852,529 12,467,116 1,385,413 - Short-Term Investments 8,119,112 8,119,112 8,119, The type of security included within each hierarchy in the above tables is as follows: Level 1 Measurements Bonds: Comprised of actively traded U.S. Treasury notes. Common Stock: Comprised of actively traded exchange listed mutual funds and common stocks. Short-Term Investments: Comprised of money market mutual funds. Level 2 Measurements Bonds: Comprised of U.S. Government, municipal, and corporate securities. Common Stock: Comprised of privately placed corporate securities. 6. Annuity Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics Annuity actuarial reserves and deposit liabilities, by withdrawal characteristics, as of December 31 are as follows: Subject to Discretionary Withdrawal - With Adjustment: With Market Value Adjustment With Fair Value Adjustment and Surrender Charge of 5% or More At Book Value Less Surrender Charge of 5% or More At Market Value Subtotal Subject to Discretionary Withdrawal - Without Adjustment: At Book Value (Minimal or No Charge or Adjustment) Not Subject to Discretionary Withdrawal Provision $ 200,357,981 $ 201,224,931 6,010,657 16,869,948 21,421,821 26,386, , , ,964, ,653, ,644, ,731,186 78,646,587 73,496,114 Total Annuity Actuarial Reserves and Deposit Liabilities 467,255, ,880,526 Less Reinsurance (43,530) (42,839) Total Annuity Actuarial Reserves and Deposit Liabilities $ 467,212,243 $ 461,837,687 Included in the annuity actuarial reserves and deposit liabilities, $51,433,947 and $46,450,769 for 2014 and 2013, respectively, relates to the deposit administration contract for the Farmers Automobile Insurance Association Retirement Plan, of which the Company is a participant. 27

30 Reconciliations of total annuity actuarial reserves and deposit liabilities as of December 31 are as follows: Annuities, Net Deposit-Type Contracts $ 398,283,995 $ 398,526,895 68,928,248 63,310,792 Total Annuity Actuarial Reserves and Deposit Fund Liabilities $ 467,212,243 $ 461,837, Life and Health Reserves A. Life Contracts and Deposit-Type Contracts The Company waives deduction of deferred fractional premiums upon death of an insured and returns any portion of the final premium beyond the date of death. Surrender values are not promised in excess of the legally computed reserves. Policies subject to an extra premium because the insured is placed in a special rating class are valued as follows: Premium-Paying Policies Extra premiums are charged for all substandard lives plus the gross premium for the insured s age. Mean reserves are determined by computing the regular mean reserve for the plan at the insured s age holding in addition one-half (1/2) of the extra premium charge for the year. Paid-Up Policies For whole life policies that are known to have been based on a substandard mortality table, the reserves are those based on the same substandard table. As of December 31, 2014 and 2013, the Company had $307,529,262 and $253,574,720, respectively, insurance in force for which the gross premiums are less than the net premiums according to the standard valuation set by the State of Illinois. Deficiency reserves to cover the difference between gross and net premiums totaled $2,263,759 and $1,983,292 at December 31, 2014 and 2013, respectively. The insurance amount does not include insurance on policies for which deficiency reserves are either exempted or calculated to be zero on a seriatim basis. Tabular interest, tabular less actual reserve released, and tabular cost have been determined by formulas used in accordance with the Statutory Accounting Practices. Tabular interest on deposit funds not involving life contingencies are computed based on the interest rate actually credited to the funds using interest rates as approved by the Board of Directors. 28

31 B. Liability for Health Claim Reserves Activity in the claim reserves is summarized as follows: Balance at January 1 Less Reinsurance Recoverables Net Balance at January 1 Incurred Related to: Current Year Prior Years Total Incurred Paid Related to: Current Year Prior Years Total Paid Net Balance at December 31 Plus Reinsurance Recoverables Balance at December $ 19,721,129 $ 21,700,373 31,204 37,335 19,689,925 21,663,038 58,642,965 72,820,973 (5,397,006) (5,042,721) 53,245,959 67,778,252 44,597,815 55,437,521 11,851,921 14,313,844 56,449,736 69,751,365 16,486,148 19,689,925 19,824 31,204 $ 16,505,972 $ 19,721,129 Health claim reserves of $4,952,244 and $4,367,029 and health contract claims of $11,533,904 and $15,322,896 as of December 31, 2014 and 2013, respectively, are included in the previous table and their respective liabilities in the balance sheet. As a result of actual claim payments varying from previous estimates of insured events and subsequent reserve changes, the provision for claim benefits decreased by $5,397,006 and $5,042,721 in 2014 and 2013, respectively. C. Premium and Annuity Considerations Deferred Deferred life insurance premiums and annuity considerations as of December 31 are as follows: Ordinary New Business Ordinary Renewal Group Life Total Net of Net of Gross Loading Gross Loading $ 1,416,291 $ 752,694 $ 1,293,364 $ 753,951 10,226,736 17,291,538 9,322,586 15,581, ,707 1,392, ,969 1,360,220 $ 12,425,734 $ 19,436,859 $ 11,421,919 $ 17,695,435 29

32 8. Federal Income Taxes The Company is taxed as a life insurance company on the basis of combined net investment income, capital gains, and underwriting income. Federal income tax expense differs from the amount obtained by applying the federal income tax rate of 34 percent to pretax income for the years ended December 31, 2014 and 2013, due to the following: Computed Expected Federal Income Tax Expense $ 2,615,180 $ (176,020) Increase (Decrease) in Taxes Resulting from: Statutory Reserves Versus Tax Reserves (81,103) 34,413 Investment Income (468,849) (739,754) Deferred Acquisition Costs 596, ,550 All Others 355, ,331 Federal Income Tax Expense $ 3,017,351 $ 271,520 Tax on Capital Gains 1,968,980 - Taxes Incurred $ 4,986,331 $ 271,520 The components of the net deferred tax asset as of December 31, 2014 and 2013, are as follows: 2014 Ordinary Capital Total Gross Deferred Tax Assets $ 15,451,398 $ - $ 15,451,398 Statutory Valuation Allowance Adjusted Gross Deferred Tax Assets 15,451,398-15,451,398 Deferred Tax Assets Non-Admitted 5,365,946-5,365,946 Subtotal Net Admitted Deferred Tax Asset 10,085,452-10,085,452 Deferred Tax Liabilities 519,442 1,151,766 1,671,208 Net Admitted Deferred Tax Assets $ 9,566,010 $ (1,151,766) $ 8,414, Ordinary Capital Total Gross Deferred Tax Assets $ 12,508,736 $ 373,052 $ 12,881,788 Statutory Valuation Allowance Adjusted Gross Deferred Tax Assets 12,508, ,052 12,881,788 Deferred Tax Assets Non-Admitted 2,705,495-2,705,495 Subtotal Net Admitted Deferred Tax Asset 9,803, ,052 10,176,293 Deferred Tax Liabilities 588,484 1,353,887 1,942,371 Net Admitted Deferred Tax Assets $ 9,214,757 $ (980,835) $ 8,233,922 Change Ordinary Capital Total Gross Deferred Tax Assets $ 2,942,662 $ (373,052) $ 2,569,610 Statutory Valuation Allowance Adjusted Gross Deferred Tax Assets 2,942,662 (373,052) 2,569,610 Deferred Tax Assets Non-Admitted 2,660,451-2,660,451 Subtotal Net Admitted Deferred Tax Asset 282,211 (373,052) (90,841) Deferred Tax Liabilities (69,042) (202,121) (271,163) Net Admitted Deferred Tax Assets $ 351,253 $ (170,931) $ 180,322 30

33 The net admitted deferred tax asset was determined using the guidance related to admissibility provided in the following paragraphs of NAIC Statement of Statutory Accounting Principles No. 101 (SSAP 101). Admissible Under Paragraph: 2014 Ordinary Capital Total 11a. Ability to Recover Taxes Paid in Prior Years $ 3,664,956 $ 1,968,980 $ 5,633,936 11b. Expected to be Realized, After Application of Threshold Limitations 2,780,308-2,780,308 11c. Offset of Deferred Tax Liabilities 1,671,208-1,671,208 Total Admitted Deferred Tax Assets $ 8,116,472 $ 1,968,980 $ 10,085,452 Admissible Under Paragraph: 2013 Ordinary Capital Total 11a. Ability to Recover Taxes Paid in Prior Years $ 1,151,295 $ - $ 1,151,295 11b. Expected to be Realized, After Application of Threshold Limitations 6,709, ,052 7,082,627 11c. Offset of Deferred Tax Liabilities 1,942,371-1,942,371 Total Admitted Deferred Tax Assets $ 9,803,241 $ 373,052 $ 10,176,293 Admissible Under Paragraph: Change Ordinary Capital Total 11a. Ability to Recover Taxes Paid in Prior Years $ 2,513,661 $ 1,968,980 $ 4,482,641 11b. Expected to be Realized, After Application of Threshold Limitations (3,929,267) (373,052) (4,302,319) 11c. Offset of Deferred Tax Liabilities (271,163) - (271,163) Total Admitted Deferred Tax Assets $ (1,686,769) $ 1,595,928 $ (90,841) Ratio Used to Determine Recovery Period and Threshold Limitation Amount Under Paragraph 11b 1023% 986% Amount of Adjusted Capital and Surplus Used to Determine Recovery Period and Threshold Limitation Under Paragraph 11b $119,677,173 $121,448,919 31

34 The major components of current income taxes incurred and net deferred tax assets as of December 31, 2014 and 2013, are as follows: Change C urrent Income Tax Federal $ 5,053,886 $ 68,633 $ 4,985,253 Prior Year Under (Over) Accrual of Tax Reserves (67,555) 202,887 (270,442) Federal Income Tax Incurred $ 4,986,331 $ 271,520 $ 4,714,811 Deferred Tax Assets: Ordinary: Stat vs. Tax Reserves $ 2,088,812 $ 2,239,331 $ (150,519) DAC 6,772,032 6,188, ,974 Discounting of A&H C laim Reserves 24,891 43,742 (18,851) Unearned Premium 958, ,024 86,820 Pension Accrual 549, ,847 (5,694) Post-Retirement Accrual 1,598,648 1,284, ,615 Additional Minimum Liability for Pension Benefits 1,577, ,881 1,307,332 Additional Minimum Liability for Post-Retirement Benefits 921, , ,836 Deferred C ompensation 82,699 69,565 13,134 Directors Pension Liability 169, ,701 (13,552) Non-Admitted Assets 702, ,964 47,553 Other 5,937 5, Total Ordinary Deferred Tax Assets 15,451,398 12,508,736 2,942,662 Statutory Valuation Allowance Adjustment Non-Admitted 5,365,946 2,705,495 2,660,451 Admitted Ordinary Deferred Tax Assets 10,085,452 9,803, ,211 Capital: C apital Loss C arry-forward $ - $ 373,052 $ (373,052) Other Total C apital Deferred Tax Assets - 373,052 (373,052) Statutory Valuation Allowance Adjustment Non-Admitted Admitted C apital Deferred Tax Assets - 373,052 (373,052) Admitted Deferred Tax Assets $ 10,085,452 $ 10,176,293 $ (90,841) Deferred Tax Liabilities: Ordinary: Accrual of Discount $ 407,140 $ 350,899 $ 56,241 Bonus Depreciation 104, ,359 (126,783) Dividend Accrual Adjustment 7,726 6,226 1,500 Other Total Ordinary Deferred Tax Liabilities 519, ,484 (69,042) Capital: Unrealized Gains C ommon Stock $ 1,151,766 $ 1,353,887 $ (202,121) Total C apital Deferred Tax Liabilities 1,151,766 1,353,887 (202,121) Total Deferred Tax Liabilities $ 1,671,208 $ 1,942,371 $ (271,163) Net Deferred Tax Assets $ 8,414,244 $ 8,233,922 $ 180,322 32

35 As of December 31, 2014 and 2013, the Company had no operating loss carry-forwards. Capital loss carry-forwards available at December 31, 2014 and 2013, were $0 and $1,097,212, respectively. The following are income taxes incurred in the current and prior years that will be available for recoupment in the event of future net losses: 2014 $ 5,049, $ $ 584,259 Federal income tax returns of the Company have been examined by the Internal Revenue Service for all years through In the opinion of management, the liability for federal income taxes is sufficient to cover computed taxes for the current and prior years that are currently payable. As of December 31, 2014, the Company has not identified any material loss contingencies arising from uncertain tax positions. The Company has no tax-planning strategies that had a material impact on adjusted gross and net admitted deferred tax assets. 9. Capital and Surplus and Dividends The Company is required to maintain minimum surplus established by the Department of Insurance. The Company is also subject to Risk-Based Capital (RBC) requirements promulgated by the NAIC and adopted by the Department. The RBC standards establish minimum surplus requirements for insurance companies. The RBC formula applies various weighting factors to financial balances or various levels of activities based on the perceived degree of risk. At December 31, 2014, the Company s surplus exceeded the minimum levels required by the Department and RBC standards. The Company s unassigned surplus was increased (reduced) by the following cumulative amounts at December 31, 2014 and 2013, respectively: Net Unrealized Gains $ 3,304,917 $ 3,906,219 Non-Admitted Assets $ (2,056,509) $ (1,926,366) Asset Valuation Reserve $ 7,749,896 $ 7,036,038 Provision for Reinsurance $ 9,717 $ 10,497 Non-cumulative dividends are paid quarterly as determined by the Board of Directors. The maximum amount of dividends which can be paid by a State of Illinois domiciled insurance company to shareholders without prior approval of the Director of Insurance is limited to the greater of 10 percent of statutory surplus or the net income of the company for the preceding year. Statutory surplus at December 31, 2014, was $120,332,789. The maximum dividend payout which may be made without prior approval in 2015 is $12,033,279 33

36 Inner Circle Club Members TOP PRODUCERS FOR 2014: John Aiken S.C.D. Rea & Sons Insurance Agency Benton, Illinois Anthony Burkhart Burkhart Insurance Agency, Inc. Vincennes, Indiana Steve Anderson A.W. Anderson Agency, Inc. Loves Park, Illinois Terry Busch Busch Insurance Agency, Inc. Platteville, Wisconsin Douglas Apt Apt Insurance Agency, Inc. Monee, Illinois Greg Cannedy Prairie State Insurance Agency, Inc. Springfield, Illinois Gary Ashley Harmon and Harmon Insurance Agency, Inc. Abingdon, Illinois Pamela Chaney Chaney & Karch Insurance Group, Inc. Centralia, Illinois Daniel Berlin Insurance Solutions Network, LLC Villa Park, Illinois Christian Cyr Comprehensive Insurance Services, Inc. Princeton, Illinois Jordan Billington Runyon Insurance Agency, Inc. Olney, Illinois Al Czerniewski Czerniewski Insurance Agency Crivitz, Wisconsin Scot Blessinger James A. Blessinger Agency, Inc. Jasper, Indiana Thomas Doran Doran Insurance & Services, Inc. Stronghurst, Illinois Jessica Booton Doran Insurance & Services, Inc. Stronghurst, Illinois Andrew Drewes Kinmundy Insurance Service Kinmundy, Illinois Darryl Bouxsein Comprehensive Insurance Services, Inc. Peoria, Illinois Marshall Eccher Eccher & Associates Insurance Agency, Inc. Millstadt, Illinois Clay Bradley The Insurance House Marion, Illinois Julia Eckhoff First Gabrielson Agency Belmond, Iowa 34

37 Inner Circle Club Members (Continued) Dale Edgecombe Decatur Mutual Insurance Agency, LLC Decatur, Illinois James Gray Purdum Gray Ingledue Beck, Inc. Macomb, Illinois Michael Edwards Hugh F. Miller Insurance Agency, Inc. Rock Falls, Illinois Adam Grimes Harris Agency, Inc. Rossville, Illinois Joseph Feldbruegge Feldbruegge Insurance Agency, LLC Abbotsford, Wisconsin Nicole Grisanzio Broadmoor Agency, Inc. Rockford, Illinois Randy Fergurson Randy Fergurson Insurance Greenfield, Illinois Randall Hallam H.J. Mitchell Insurance Agency, Inc. Albion, Illinois Robert Fortner Fortner Insurance Agency, Inc. Peoria, Illinois Rick Hamilton Weber Insurance and Realty Brokers, Inc. Robinson, Illinois Jay Freeman Norris Insurance Agency, Inc. Amboy, Indiana Daniel Harnish Marvin F. Uecker Agency Lena, Illinois Kent Frisbie Frisbie & Lohmeyer, Inc. Woodstock, Illinois Bart Hartauer Hartauer Insurance Agency, Inc. La Salle, Illinois Ryan Fuhrman Fuhrman Insurance Agency Unlimited, Inc. Franksville, Wisconsin Rodney Henry Taylor, Dodd & Wood Insurance Agency, Inc. Anna, Illinois Terry Garner Garner Insurance Lancaster, Ohio Stephen Henson Prairieland Insurance Group Champaign, Illinois Andrew Gower Gower Insurance Agency, Inc. Metropolis, Illinois Mike Hermes Northeast Insurance, Inc. Green Bay, Wisconsin 35

38 Inner Circle Club Members (Continued) Douglas Hoch Hoch Insurance Agency, Inc. Fort Wayne, Indiana Jay LeFevre First Gabrielson Agency Clear Lake, Iowa Jeffrey Hoffman Crum-Halsted Agency, Inc. Sycamore, Illinois Steven Lendosky Brechler-Lendosky Group, LLC Fennimore, Wisconsin Timothy Hughes Grojean Realty & Insurance Agency, Inc. Jacksonville, Illinois Bill Livengood Griffin-Rahn Insurance Agency, Inc. Pekin, Illinois Timothy Humpal A.W. Anderson Agency, Inc. Loves Park, Illinois Brian Loman Loman-Ray Insurance Group, Inc. Broadlands, Illinois Cheryl Jennings Jennings Insurance Agency, Inc. Rochester, Indiana Travis Mains C.H. Smith Insurance Agency, Inc. Danville, Illinois Robert Keller Frimark/Keller & Associates, LLC Schaumburg, Illinois David Marcell Marcell Insurance Agency, Inc. Schofield, Wisconsin Lucas Knight Knight Insurance Services Chrisman, Illinois Casey Martin Dempster Insurance Agency, LLC Peoria, Illinois Dennis Koch Koch Insurance Agency, Inc. Nashville, Illinois Jason Mathy Meyer Agency, Inc. Chebanse, Illinois Kevin Krug Lakeshore Financial Group, LLC Fond du Lac, Wisconsin James Moore C.H. Smith Insurance Agency, Inc. Danville, Illinois Chester Lawrence Lawrence & Bean Insurance Agency, Inc. Vienna, Illinois Eldon Neighbor Neighbor Insurance Services, Inc. Alburnett, Iowa 36

39 Inner Circle Club Members (Continued) Mark Neighbor Neighbor Insurance Services, Inc. Central City, Iowa Chad Schmitt Smith & Hatch Insurance Agency, Inc. Eden, Wisconsin Eric Nier Clabough & Associates Wittenberg, Wisconsin James Schulze Prairieland Insurance Group Champaign, Illinois Robert Oetting Bob Oetting and Associates Charleston, Illinois Thomas Schwab Schwab Insurance & Real Estate, Inc. Nora Springs, Iowa Jeffrey Olson Insure-Rite Evergreen Park, Illinois John Schweighart The Hillard Agency, Inc. Tuscola, Illinois Brian Paquette Stolarick & Company, Inc. Gurnee, Illinois Marshall Sheffer Sheffer Insurance Agency Herrin, Illinois Thomas Pavletic Lilian Financial Gurnee, Illinois Daniel Springer Springer-Springer Insurance Orleans, Indiana Jay Peterson Peterson Insurance Services, Inc. Clinton, Illinois Greg Steffen Compass Insurance Partners Le Roy, Illinois Ryan Ramsey Ramsey Financial Services, Inc. Bowen, Illinois James Stout Stout Insurance Agency, LLC Freeport, Illinois Merri Richards Martin Insurance Agency Island Lake, Illinois Craig Swanson Aleckson Insurance Agency Mundelein, Illinois Richard Runyon Runyon Insurance Agency, Inc. Olney, Illinois Lon Tay The Hillard Agency, Inc. Villa Grove, Illinois 37

40 Inner Circle Club Members (Continued) Kent Tinucci MDC Insurance Agency Gurnee, Illinois Bruce Wonsmos First Gabrielson Agency Thornton, Iowa Gregory Toensing Insurance Planning & Management Consultants, Inc. Okawville, Illinois Tina Yates Greene County Insurance, LLC Xenia, Ohio Brian Van De Hey Brian Van De Hey Insurance & Financial Planning, Inc. De Pere, Wisconsin Guy Van Dyn Hoven Van Dyn Hoven Insurance Agency, Inc. Little Chute, Wisconsin Christopher Venters Andy Harmon Insurance Agency, Inc. Monticello, Indiana Michael Vollmer Bartonville Insurance Agency, Inc. Bartonville, Illinois Robert Weller Weller Hooker Agency Dwight, Illinois Jay Wessler Wessler Bros. Agency, Inc. Arenzville, Illinois Scott Wilde Harman-Wilde Insurance Osage, Iowa 38

41 Board of Directors Scott A. Martin, Chairman Steven R. Anderson, Vice Chairman Craig W. Concklin Daniel V. Connell Byron A. Dodd Thomas C. Hornstein A. Richard Kriegsman Christine A. Schwartz Gordon M. Walker Officers Scott A. Martin Chairman of the Board President Chief Executive Officer Daniel V. Connell Senior Vice President Chief Financial Officer Secretary Brian K. Lee Senior Vice President Chief Operating Officer Todd A. Clark Senior Vice President Gregory L. Feller Vice President Sales Joel M. Jackson Vice President Marketing Neal P. Kaderabek Vice President Chief Information Officer Diane K. Steiner Vice President Life Underwriting Assistant Secretary Michael A. Zabinski Vice President Controller Advisors Auditors Strohm Ballweg, LLP General Counsel Kuhfuss & Proehl, P.C. Medical Director James R. Smalley, M.D., Ph.D. 39

42 Vision Statement Our vision is to set the standard of excellence among insurance providers by being innovative, being financially strong, and exceeding customer expectations. We will attract and retain the very best employees and agents to help us achieve this goal. Mission Statement Pekin Insurance provides financial protection and peace of mind for our policyholders by offering quality insurance products through independent agents. In all we do, we are dedicated to going Beyond the expected. Our Values In today s uncertain world, Pekin Insurance still stands strong by adhering to our foundation of values: we are people-focused and motivated by a genuine caring for our employees, policyholders, agents, and community. Our philosophy is conservative. Our solutions, high-tech. But above all, our values are best expressed not through words, but actions. We respond. Follow through. Until we get results that go beyond... Beyond the expected. 40

43 For our employees, agents, and policyholders, we strive to be... Quick. To communicate. To respond. To solve. Innovative. In our products. Our technology. Our thinking. Nimble. We challenge. We adapt. We bend, never break. Sensible. We listen. We weigh all sides. We are prudent. Reliable. We are dependable. Steady. The calm inside the storm. Tech-Savvy. We are efficient. Effective. Easy to do business with. Respected. By our agents. Our policyholders. Our team. The industry. When you need us, we re there. Not only with answers, but with the right questions. We re innovative. Yet practical. We look for the how. Not why. We find new ways. We listen. We understand. We deliver. Our rule is golden: Give customers what we would want ourselves. Service that goes the extra mile. Products that meet today s needs and tomorrow s. And the financial stability that provides what we all want in today s world: peace of mind. Pekin Insurance is committed to going beyond. Beyond the expected.

44 Universal Life Preferred Whole Life Term Life Transitional Life Flexible & Single Premium Annuities Medicare Supplement Disability Income Credit Life Debt Protection Group Insurance Qualified Retirement Programs for Individual & Business Needs Funeral Preplanning Self-Funded Employee Benefit Plan Administration Pekin Life Insurance Company, headquartered in Pekin, Illinois, became an integral member of the Pekin Insurance group of companies in April Joining together with our property/casualty companies, The Farmers Automobile Insurance Association, Pekin Insurance Company, and PAC, Inc., we are committed to providing quality insurance service to our policyholders spanning a 21-state marketing area. Our property/casualty products deliver coverage to protect homes, autos, businesses, and a wide range of other insurance needs. The Company s life and health products listed on the left offer a diverse portfolio of coverages to help families and businesses achieve secure financial futures. Whether for property/casualty, life, annuity, or group health insurance, we are committed to going the extra mile to provide the products and services necessary for your peace of mind. Now, more than ever, it is important that policyholders have complete trust in their insurance company. Pekin Insurance... going Beyond the expected to meet your insurance needs. PEKIN LIFE INSURANCE COMPANY